Bank of America, Morgan Stanly cut GDP forecast for the current fiscal

November 29, 2016 — INDOLINK Consulting (es)

Source: The Hindu Business Line, Nov 28, 2016

Mumbai: Bank of America Merrill Lynch (BofA) today trimmed the country’s economic growth estimates by 30 basis points to 7.4 per cent for the current fiscal, and while global financial services giant Morgan Stanley downgraded its GDP growth forecast for the current fiscal from 7.7 per cent to 7.3 per cent. Both expect the government’s demonetisation move to hurt near-term economic activity.

Besides, Bank of America has has lowered its GDP number by 30 bps to 7.6 per cent for the next fiscal (2017-18). Morgan Stanley has also lowered the growth projection for 2017-18 to 7.7 per cent, from 7.8 per cent, pegging it at 7.9 per cent for 2018-19.

Growth Story on Track

“Though the overall growth story remains on track, the government’s recent decision to replace high-value currency is expected to affect near-term economic activity, thus leading to a slower pace of growth recovery,” Morgan Stanley said in a note today. “As economic activity normalises after first quarter of 2017 and demand for private capex kicks in, we expect a more balanced growth recovery in 2018.”

According to Morgan Stanley, the growth is likely to get back on the recovery path from the second quarter next year, with support from consumption and exports.

“The economy will be firing on all engines with private capex taking off from 2018,” it said. It noted that demonetisation will affect domestic demand on account of disruption in cash transactions until the end of December.

Moreover, the government’s clampdown on black money will potentially make households hold back spending on big-ticket items in the near term and property spending in the medium term.

However, the report noted that external demand has begun to turn around over the last four months, with gains led by non-commodity exports.

“As global growth accelerates to 3.4 per cent in 2017 from 3 per cent in 2016, we expect India’s exports to support overall recovery in 2017 after being a drag in 2016,” it said.

Private Capex

According to Morgan Stanley, private capex growth is likely to be weak in 2017 while the government continues to push public capex in infrastructure.

“Private capex recovery will be held back for one more year (2017) in view of low industry capacity utilisation, plus the weak balance sheets of state-owned banks and select industrial sectors,” the report said.It also noted that the government will maintain fiscal discipline and continue its efforts to revive private capex and productivity—enhancing policy reforms.

Cash Reserve Ratio

BofA said the Reserve Bank (RBI) would cut rates by 25 basis points in the upcoming policy review on December 7, as the “conversion of black money into deposits allow banks to cut lending rates even in October-March busy industrial season”.

BofA said it is relieved to hear RBI governor Urjit Patel’s comments that the banking regulator will review the CRR (cash reserve ratio) hike as soon as the government issues an adequate quantum of MSS (Market Stabilisation Scheme) bonds. However, it noted that as CRR does not pay interest, banks would find it difficult to cut lending rates even if the RBI cuts lending rates by 25 bps in December.

“With RBI now set to shift from CRR hikes to the standard mix of reverse repos, T-Bills, Cash Management Bills and MSS bonds, that all pay interest, we continue to expect banks to cut lending rates (by 75 bps by September 2017) that holds the key to recovery,” it added.

Over the weekend, RBI had asked banks to set aside 100 per cent of the deposits between September 16 (weeks before the end of the income disclosure scheme) and November 11 (three days after the currency delegalisation was announced) as incremental cash reserve ratio balance with it.